Buildings Insurance Covers Rebuild Cost Not Market Value

The sum insured on a buildings policy is not the price of the house. It is an estimate of construction cost, and confusing the two produces both over-insurance and under-insurance.

Land is not insurable and forms much of the price

Market value combines the structure with the plot, its location and the access to schools, transport and employment that the location provides.

None of that is destroyed by fire or flood. The land remains, so a policy that paid market value would be paying for something that was not lost.

In high-value areas land dominates the price, which is why rebuild figures can look startlingly low against what the property would fetch.

Rebuild cost is driven by construction inputs

The figure reflects materials, labour, site access, demolition and clearance, professional fees and compliance with current building requirements rather than the ones in force when the house was built.

Those inputs move on their own cycle. Construction costs can rise sharply while property prices are flat, which pulls the two figures apart in ways that surprise policyholders.

Unusual construction raises the figure considerably. Period buildings, non-standard materials and protected structures can cost far more to reconstruct than to buy.

Under-insurance can reduce a partial claim

Many policies contain a provision reducing settlement in proportion to the shortfall where the sum insured is materially below the true rebuild cost.

The consequence is that under-insurance is not only a problem for total losses. A modest claim can be scaled down because the declared figure was wrong.

Whether and how such provisions apply depends on the policy wording and on local insurance regulation, both of which vary by jurisdiction and change over time.

Indexation drifts and needs checking

Insurers commonly increase the sum insured automatically each year using a construction index, which keeps a correct figure roughly current.

Indexation cannot correct a figure that was wrong to begin with, and it does not know about extensions, conversions or upgraded finishes added since the policy started.

So the figure needs revisiting after any significant work, and periodically in any case, since an index applied to a stale base compounds the original error.

Leasehold and shared buildings sit outside this entirely

Flats within a larger building are usually insured collectively by whoever is responsible for the structure, with the cost recovered through service charges.

Individual owners in that position insure contents and their own interest rather than the building, and the adequacy of the block policy is not within their control.

Which makes the terms of that policy, and who is responsible for arranging and reviewing it, a question worth asking before purchase rather than after a claim.